Citigroup Still Selling Mortgages That Violate Quality Standards

15% of the mortgages Citigroup sold to government-owned Freddie Mac from the second half of 2009 and the first part of 2010 were riddled with flaws, according to an internal report obtained by Bloomberg. The error rate should be about 5%. The mistakes included missing insurance docs, missing appraisals and income miscalculations.

Other defects on these mortgages included missing verification that student loan payments were deferred and missing proof of flood insurance. In one, the “maximum loan amount was exceeded,” according to the memo.

What’s odd is that these are completely new mortgages, not ones from the wham-bam era of 2005-2008. Even still the banks can’t, or just don’t feel like they have to, get their act together.

Companies that bought the loans from Citigroup and turn them into securities can ask for their money back if they find out that the loans weren’t up to snuff. Those repurchases would put a dent in Citigroup’s ballyhooed gain of 46%, their first full-year profit in four years.

If only it were established into law that negligence on the part of the mortgage company would automatically result in the voiding of the mortgage and transfer paid-in-full title to the mortgage holder.

The odds would be far better than the lottery and perhaps it would spur home sales and even speculators hoping to profit from bank ineptitude.

If that were put into place banks would stop lending for 3-6 months, and the red tape to get a mortgage afterward would be tremendous. Closing costs would triple, and an insurance market would be created.

It seems that Citigroup missed their earnings per share by 50%, that and all these other “little” things show that Citigroup still has a long way to go. Unfortunately they still operate in the pre-recession business as usual mindframe and Wall Street is punishing the stock right now: it’s down by almost 7%.

“15% of the mortgages Citigroup sold to government-owned Freddie Mac from the second half of 2009 and the first part of 2010 were riddled with flaws, according to an internal report obtained by Bloomberg.”

So why did government-owned Freddie Mac purchase them? Must be one of those bureaucratic snafus where they do something then check to see if they can!

I think it depends on the severity of the error and/or the consequences, though. Sure, the ones listed in the article are severe, but are they the majority of the 5%? It could be that .5% have errors like the ones cited, and the other 4.5% are things like “Misspelled maiden name”.

More than likely this is the case. I believe, however, it is symptomatic of larger mindset of carelessness, arrogance, and incompetence. While single mortgages are drops in the bucket to Citi as whole, they are massive personal investments from the perspective of the borrower that deserve extreme attention to detail. That one missed digit in the SSN can end up impacting the wrong person’s credit score. That misspelled name may cause a check not to clear and trigger the late payment process. The simple fact of the matter is a 5% error rate is just too high.

That’s what I thought, too! 5% is huge. How would things go if 5% of my credit card payments had an error in the account number? Not so acceptable. Yet on a alone equal to 5 years’ salary for me, no big deal?

Could you imagine if 5% of stock trades, or deeds, or driver’s licenses, or car registrations had errors?

Citigroup got away with it before and they know they can get away with it again. After all, they paid enough dirty money to Congress. They will do whatever it takes to earn a profit, even if it’s flat out illegal.

Don’t worry, Citigroup is taking self-regulation very seriously, no need for actual standards or requirements. Besides, who do you think will bail them out if Freddie Mac asks for refunds on the defective loans?

A mortgage is a contract. An illegal contract is void; hence, in theory, the mortgage does not have to be paid. The caveat is that portions of a contract can be ruled illegal and the contract as a whole can still be valid. This is definitely one for the courts to decide.

If I had one of these mortgages, I would be in court. The first order I would ask for is one establishing a trust account for me to make my mortgage payments so that if I prevail, I get the money back. You just can’t stop paying because that gives the bank the advantage of being the plaintiff.

Next, as the innocent victim of the bank’s illegal activity, I would seek a ruling which would give me free and clear title to the property. Chances are, if enough of the contract is found to be illegal, I’d prevail.

If not, I’d seek damages restoring me to my original position. In other words, refunding my down payment and any other money paid in connection with the purchase, covering all costs associated with the move including new furniture and appliances, restoring my previous residence and so on. I’d bet they’d just settle for letting me keep the house.

At the very least, I would get costs and possibly damages for the emotional distress of having to challenge an illegal contract.

I really wanted to cheer you on….but if you RTFA, you’ll see that the defects are in the underwriting, not the consumer mortgage. Therefore, those who bought the securitized mortgages from the originating bank (in this case Freddie Mac) were screwed by the originating bank (Citigroup) because that bank was sloppy about documenting the quality of the product (securitized mortgages) that they were selling; now that quality is unverifiable or verifiably lacking.

Why should banks be like mean ol’ Mr Potter and only issue quality, or at least credible, loans? They can be free-spending George Bailey and issue junk loans and hope nobody notices (again). At worst, they’ll recoup their losses from the taxpayer via TARP. After all, Citigroup is “too big to fail.”